I was just wondering if this equation is used commonly to measure ROE in practice. My teacher called the Dupont Analysis wrong. His main reason was that when you take (NI/Sales)*(Sales/Assets) you get (NI/Assets) which isn’t an accurate measure of the return on assets because you subtract Int. Exp to get to NI. His “correct model” of ROE is: ROA* + (D/E)*(ROA*-Kdat) Where ROA* = NOPAT/Assets Kdat = Cost of debt after tax I haven’t seen this in the CFAI curriculum yet, and was just curious if this is common way to measure ROE.
Could be wrong but… ROE is based on accounting conventions so there are many problems with it… (NI/Sales)*(Sales/Assets) is ROA to get to ROE for dupont you need to multiply by the leverage factor (Assets/Equity). Yoru profs “correct” model looks like it should be equivalent to 5 factor dupont which accounts for taxes etc.